Collapsing case for privatisation

The Bligh government’s case for asset sales rests in part on a supposed fiscal emergency arising from the global financial crisis and in part from the general ideological claim that putting infrastructure assets into the hands of the private sector will promote economic efficiency. Both parts of the case have taken a knock in the last couple of days. A study by Access Economics confirms the findings of the union-commissioned study by Bob Walker and Betty Con Walker (derided by the government and state Treasury at the time) that the budget position is much stronger than has been admitted so far.

On the second point, Liberal Lord Mayor of Brisbane Campbell Newman has conceded that the days of private toll roads are probably over. As I’ve been saying for years (getting on for decades now) these projects always involve a social loss. In the 1990s, it was almost always the public that took the loss while private operators made out like bandits. In the easy money environment of the 2000s, private investors made silly investments, and often lost the lot. Now that everyone has wised up, there will be no more deals like this.

By far the best solution would be for the state government to buy back all the toll roads, and replace ad hoc tolls with a coherent system of congestion pricing. The Bligh government instead, plans to sell off its own toll roads. As for congestion pricing, Anna Bligh has made her view pretty clear “not while this government is in office”. In reply to which I can only quote Men in Black – “Your offer is acceptable”.

Roads should never be priced to recover their costs. If a road is uncongested then adding an extra driver adds nothing to social costs so that, from an efficiency perspective, the roads should be unpriced. Their funding should be based on tax revenues. Dupuis pointed this out more than 100 years ago and the nits like Anna Bligh and John Brumby should learn. If roads are congested – in many situations they need to be to reflect capital cost – travel time tradeoffs, then they should be subject to congestion charges equal to the marginal congestion cost. If road services display constant returns to scale then this will recover the costs of the road by well-known theorems in traffic economics. If a monopolist is put in charge of a road they will charge excessive tolls from the viewpoint of managing congestion – Eastlink and Citylink in Melbourne charge tolls when there is no congestion.

The best procedure is to get the private sector to build roads but to leave their management to government – tolls should be set to cover external costs such as congestion (but also vehicle damage costs) not to recoup costs. If roads earn npure profits on this basis they should be expanded.

Maybe we should be putting more effort into getting cars to drive themselves, as we don’t seem to be very good at doing it ourselves. Of course cars need not be fully autonomous to reduce conjestion. A system that allowed cars to automatically and safely match the acceleration and deacceleration of the car in front would hould be very helpful. Mind you, we’d probably have to limit how close these cars can get to the vehicle in front at first to stop people freaking out about being tailgated. This sort of system is something that technology can handle pretty well now and various companies are mucking around with this concept.

I emphatically agree, John, that we should be thinking of the need to reduce emissions and traffic congestion, not trying to figure out how our business mates can make money out of unsustainable and needless economic activity.

Thankfully, a small contingent of economists like yourself and the Walkers have been differentiating themselves from the Harvard sheep for a number of years, pointing to the fact that privatisation is nonsense – the maths does not add up and the social/environmental consequences are un-calculated, uncontrolled and likely to be negative and costly.

Premier Anna Bligh is obsessed with growth, with recruiting Sydney residents to flood into Brisbane and with the privatisation of infrastructure with ideological zeal. Similarly, Campbell Newman will probably go down in history as the most expensive mistake the people of Brisbane ever made. It is revealing indeed that Anna Bligh will not countenance congestion pricing on the roads, as she is unconcerned with social or environmental consequences.

When Brisbane is concreted over with all the most obsolete infrastructure (designed for the private motor vehicle – not public transport), all in private hands, the city will be extremely vulnerable to the forces of global warming and peak oil. What does it take, short of Dr House and his defibrillators, to wake the disengaged Brisbane electorate, who have been had, big time?

That way use of the road will go to the ‘highest value user’ and he will be able to drive his merc or rolls or four wheeled tank or whatever, on the road, unmolested by those who really don’t value the experience at all. You know, that lower class of person who has simply chosen not to be born to wealthy parents, or chosen not to otherwise obtain a mint of money, and instead has chosen a life of poverty, or bludging or, shame, working for a living.

As to if the road networks ownership should be in public or private ownership is in the final analysis an irrelevant question IF IT WORKS. But the problem the community suffer is that both forms of ownership bring the unhelpful bias of the operators. Private operators only want those high-demand highway links that will generate good profits, free of any responsibility for the impact on the network as a whole, with the funding black-hole of all those loss-generating tedious back-streets. Public operators are too beholden to the shorter ballot-box outlook and noise interest group. Such that they will never make elector-ally unpopular but wise management initiative like (as badly conceived as it is) congestion pricing.

Unfortunately congestion pricing is just a way for the rich to price the poor off the roads. The more just solution is privatize the congestion and leave the network in the public ownership see Razoos ;_ http://www.auzgnosis.com/greens/razoos.htm

Interesting and perhaps workable but … this sounds a lot like cap and trade … I also don’t see how it avoids the problem of rich people pricing poor people off the road. It might be that the price to achieve that might be higher than some other system, but this is how it would work.

I’m not even sure, for the record that a system in which poor people have less direct access to road space is inherently inequitable. Relatively disadvantaged people represent most of the traffic. They are most often injured or involved in injuring others. Getting them onto quality public transport would greatly improve their safety and if they get a suitable transfer payment in cash or kind, be equitable. Since motor vehicle exhaust damages both people and property, and most people are on the wrong side of the pareto line and most of those harmed the least are on the right side of it, then again, the measure is equitable.

It also means that there is less political pressure to pressure to build new roads or have urban sprawl, and this too tends to be equitable, since those on the margins of the big cities tend to be near the bottom of social advantage.

So despite the negative and visceral quality of the idea of the rich pricing the poor off the roads, it may be as well that they do so, provided they pay the right price in cash and kind.

“By far the best solution would be for the state government to buy back all the toll roads, and replace ad hoc tolls with a coherent system of congestion pricing.”

Not that I live in Queensland, but if I did, I’d wait eagerly for the second one of these to occur on roads that are already public that need it before getting the government in on the first (I assume the same arguments apply in other states). It seems to me this is the real problem with the suggestion — everyone simply wants roads at no direct cost to themselves, and no governments have the guts to actually implement decent congestion schemes, so all that happens is that governments pour money into roads which end up as competition against other forms of transport that might actually solve some of the transport problems.

“The news on population in recent years has been good – birth rates have lifted, and migration has too. Indeed, were it not for the supply side constraints bedevilling the State’s housing construction sector, Queensland’s current population growth could have been higher still.”

Given that a lot of Queensland’s problems appear to derive from the influx of a thousand people per week, with the resulting strain on infrastructure, this sounds detached from reality. Apparently the state will do well, because more people are arriving than it can support, so the economy will just *have* to grow.

Honestly, the government should not be in the business of service delivery. It should simply provide a facilitative framework for industry with regulation where needed. As a result, privatisation is a logical step to make an orderly transition from public to private ownership.

Err Rationalist, Honestly! The government should not be in the business of government. This function should simply be outsourced, with the ‘government’ franchise being periodically re-put to tender. Fully privatised defense forces, police, judiciary, taxation and revenue collection, they could all be done so much better by the more efficient and ever more reliable private sector. Indeed, why stop there? The senate and house of reps could also do with a bout of privatisation. And the stupid impediment on so called bribery and corruption should be done away with. Bribery and corruption are simply another efficient market mechanism by which resources are allocated to the highest value users, and therefore, their best uses.

@Rationalist
Well if roads and transport (and ports) arent part of a “facilitative framework for industry” and as such something the government should provide according to Rationalist’s definition above, then Im the Queen of England again.

I don’t see why a system of congestion charges would require state governments to buy back toll roads. If the agreed toll on a particular road is too low (relative to the marginal cost of imposed by the road user) the government could levy an additional charge on top. If it is too high, the road user could get a rebate.

@Fran Barlow
Fran – you say
“Relatively disadvantaged people represent most of the traffic. They are most often injured or involved in injuring others. Getting them onto quality public transport would greatly improve their safety and if they get a suitable transfer payment in cash or kind, be equitable.”

As soon as this is done Fran..the privatisation egos will be looking for a sell off and it wont be “quality public transport” they get either. The mindset now in governments is “how can we not provide the service.” Thats what we are all up against, not just the disadvantaged (but they still want our taxes to fund their benefits).

Your suggestion of removing “the majority of traficc, by removing the raltively disadvantaged (who by your account represent most of the traffic) means effectively removing the majority from road use.

This idea is so ill thought out I cant believe it. How do you propose to measure people’s right to choose to drive…an income and assets test on road use or would that be tolls so prohibitive they cant get to work? Who Fran will build your wonderful public transport option and who’s taxes will maintain existing roads for the passage of mercedes and BMW’s only?
Yet more inequality to fix the traffic? Cant afford road use to get a job? Tough luck. What about Sydney’s great urban sprawl Fran – are you suuggesting a bus will travel down every street and connect to a great extended rail system to get people to work – or perhaps you suggest they do without work if they cant afford to travel or are unable walk great distances to a public transport node.

Congestion taxes would reduce the numbers of vehicles on roads including roads feeding into toll roads. They would have a material impact on toll road revenue. Some compensation for the toll roads would probably be required either because their contract with the government might require it or they might have a case for compensation at law. Given that requirement and the costs of negotiating a ‘fair’ amount of compensation and the risk of over compensating, the efficient solution for government might be simply to buy them out before implementing congestion taxes. Of course, this would vary case by case and would require careful analysis in each case.

Politicians love privatisation because once an entity is privatised, instead of copping any blame for poor performance or poor service provision, they can evade blame and even join in the chorus and make futile attempts to improve things. This maybe why they have embraced the ‘free market’ privatisation nonsense so whole heartedly.

It for their own good Alice. Traveling by private transport is far too good form them. It might give them the incentive to become wealthy highly productive members of society providing essential services in the finance industry, that is, like John Hewson.

Actually reading above hurts, almost got off a post last night before”losing”the thing.
Welcome back, “Gloriana”!
A combination of yourself and “metaphysics” (John Donne, anyone?) from elsewhere, now has me in a thoroughly “Renaissance frame of mind. I agree with your comment about equity. Had me in mind of a loose analogy with the situation of the woman on teev, at the current demos in Greece, wailing that they now expected the workers to pay enmasse with their jobs and futures, for flawed and delusionist policies imposed from above.
Likewise the public in the big states have to wear it for the stuff ups of “captured”neolib government and ideology.
Fran is dead right about clearing traffic from choked transport arteries, for sustanability in the future if nothing else. at bottom cars are just a consumer fetish also. But is is a very “neolib” way to go, isn’t it Fran?
Because, how do folk in the outer suburbs use flaky or non extant public transport with the public transport system itself ruined over the last generation, as (at least unconscious) policy, as Mar’n and his friends do today with coal and uranium versus alternative energy; also carperbaggers like MacBank hopping into taxpayer largesse for dodgy tunnel projects and the like?

They would have no case at all for compensation. It is settled law that one government cannot bind its successors, though as a matter of practice, states think the downside of playing fast and loose is too big a price to bear.

Even so, a general policy of road use charging would not be something which would be contractually excluded, and so even if failing to charge for tollway usage were excluded access to it from all the feed roads would render the point moot.

How do you propose to measure people’s right to choose to drive…an income and assets test on road use or would that be tolls so prohibitive they cant get to work?

No … just charge everyone according the schedule above and let them figure it out.

Who Fran will build your wonderful public transport option and who’s taxes will maintain existing roads for the passage of mercedes and BMW’s only?

It would be exactly as now, with the difference that the roads would need less maintenance since trhey would carry a lot less traffic. We would of course have the funds to maintain them AND also expand public transport in areas of apparent need. We could rezone and build more housing closer to the main areas people were driving. People would probably respond by wanting to live closer to work. A lot of cars would be sold or not bought and eventually a new equilibrium would be found based on much less intensive use of road space and private motor vehicles. There would be more car pooling and small possibly electric) shuttle buses run commercially would become viable.

It may be settled law that one government cannot bind another but is it settled law that another government can unilateral repudiate a contract without compensation? If it were why bother contracting with government. Also, is it settled law that you cannot sue the government?

No Fran , you are making the victims pay twice for the errors of their natural enemies in power.
“Market forces’ could be useful, true; the Australian”market” has certainly turned up its collective nose at being “sold” damaged refugees and wanting high immigration to further clogg up an already malfunctioning Australian systemm for example.
Do you think this instance of a working example of “market forces” at work, as “useful”?

Ah. Here we are next morning, just noticing Shanahan catalepting over a possible$ 5 billion tax on big mining.
If only he felt as exercised at the thought of the poor in Australia, let alone the billion starving in the real world, on a dollar a
day or less.

There can be absolutely no doubt that the state can unilaterally set aside contracts. They choose not to precisely for the reason you cite — and because the fact that they are certain to meet their obligations means they get a better deal on loans and on terms — or they could. This gives them an enormously good position from which to bargain.

Lets have just another example of the neolib “charging” mindset that has infected government. Out last night with a public sector friend who thinks its a great idea that the government is spending our taxes building retirement apartments that only the rich can afford to live in at $1000 plus a week.

Now the justification of course is that “if the government uses our taxes to do this it will..at some undefined future point have more money to spend on the poor, who cant afford to retire to these places, and instead are “clogging public hospital beds”.

I suppose by your logic Fran …we should really consider kicking the poor and the relatively disadvantaged out of their hospital beds as well?

Oh yes…tough love…nothing quite like it. What gets me is that some here dont see any of the insanity of the government using the taxes of the poor and disadvantaged and everyone else to build retirement homes for the rich?

You seem keen to take a swing, Alice but short of a specification of the revenue flows for your modelling, it’s hard to conclude much at all about your public sector friend’s proposal.

If the proposal involves a transfer payment to the wealthy, then of course, it would be inequitable.

The broader question you should consider Alice is this — what is the most efficient way to build deploy the resources we have to meet the needs of the majority of the citizenry? Some utilities are most efficiently built and deployed from pooled funds and some from individual or private funds. Deciding where that line should be drawn is where debate over public policy begins.

My own predisposition favours community provision for what may be called infrastructure and private provision for what may be called lifestyle. At the margins of each, I think we can negotiate to ensure equity where it is relevant, but this involves specific modelling, evidence and a means of mapping this to a maintainable and transparent system. Simply repeating heartfelt shibboleths as you do contributes nothing of substance.

For the record, I have no desire to “kick” anyone out of their hospital bed, though it is hard to imagine why someone who would be better served by some other arrangement ought to be in a hospital bed. I’d prefer they were well provided for enough not to get there in the first place.

Anyone can break a contract. I recognise that a government can break a contract. What you claim is that a government can break a contract without having to pay the penalty specified in the contract or set by the court. Are you sure of this or are you simply speculating? Are you a lawyer with the requisite knowledge in this area?

I studied law at undergraduate level, including of course, the old standard torts and contracts through the SAB course. I also did consitutional law buoth at Sydney Uni under Morrison and again as part of the SAB course.

The State of NSW (like every other state) has original sovereignty. It can, subject to the purview of the Commonwealth acting within its power and sundy provisions of the Australian Constitution, make any laws it wishes that meet the test of being “for the good government of NSW”. There are no exclusions outside of Commonwealth power, specific matters inter se and possibly any restriction implicit in the Letters Patent.

If the law aims to deal with some entity trading in or otherwise connected with NSW (or the relevant state) it is capable of being enacted. Setting aside contract provisions falls well within the scope of such power.

@Fran Barlow
Fran – you say ” I think we can negotiate to ensure equity where it is relevant, but this involves specific modelling, evidence and a means of mapping this to a maintainable and transparent system.”

I think this sort of statement more resembles a shibboleth – (some may call it jargon). Thanks to FOI laws and “commercial in confidence” provisions – there are many government activities now that are completely hidden and “transparency” means very little. Perhaps start with the law itself if you want transparency in government processes.

I am taking a swing Fran – not at you but at the meaningless terms and expressions that governments now use to justify their involvement in profit seeking activities purely for the profit motive, not to support or facilitate private enterprise, or to provide public services and manage them, but to openly compete with and against the private sector.

I am taking a swing Fran – not at you but at the meaningless terms and expressions that governments now use to justify their involvement in profit seeking activities purely for the profit motive, not to support or facilitate private enterprise, or to provide public services and manage them, but to openly compete with and against the private sector[emphasis added; FB]

.

So your problem is with the government making things hard for business? I’m having trouble keeping up with whether you are on the side of public provision of services or the corporate sector.

Governments that make “profits” on trading take private money and make it public. That surely means that the community has more funds to spend on good programs? All else being equal this is better than the other way about, surely. Unless you think private investment is by definition preferable to public investment, I wonder why you would make this claim.

When we are examining public policy, those of us who count ourselves as supporters of social justice will want to know

a) does the program reduce inequity more effectively and efficiently than any other conceivable program?
b) does the program assist those at the greatest disadvantage?
c) does the program improve productivity?
d) does the program meet reasonable sustainability tests?
e) is the program maintainable and capable of adequate audit?
f) does the program allow low cost upgrade and variation in the event that aspects of the program produce unanticipated negative externalities or foreseeable changes in demographics demand it?

Programs that meet these tests are rational, whatever jargon or slogans proponents or detractors use to describe them .

The issue isn’t whether it can break a contract, the issue is whether it can break a contract without a court being able, if it decides appropriate to make it provide compensation. You haven’t addressed this which is the issue.

Your wish has already been granted. Fuel excise taxes perform most items on your list, except breath testing. Fuel consumption is directly proportional to distance and speed travelled. When there is congestion vehicles slow down and use more fuel for the same distance travelled paying more tax in the process. That was easy.

But, Fran, I doubt that many people want to live in a world as nitpicky as your list would entail stacked on top of the many other lists that you create from time to time.

@Freelander
A minor aside – has anyone examined the costs to governments lately of contracting with the private sector and compared accounting and legal and financial costs to govt relative to twenty years ago (percentage of budgets?) – aside from contingent liabilities there are accounting and audit costs and tender preparation costs and horror of horror all those nasty legal costs billed in 5 min blocks at $100s per hour – accountants and auditors not far behind lawyers these days and we know about financial advisers.

It would be interesting to compare the costs of services directly publicly provided but of course that is off radar when many public depts now have a somewhat difficult to shift focus on modelling so called “sustainable” privatisation.

Whether it is actually “sustainable” or “productivity improving” or “maintainable” or “visionary” or “globally strategic” or whatever bla bla …outside the model, appears to matter very little…..well not enough to question the model, anyway. In part I blame the productivity commission under JH – its still hanging around.

and I love this quote below… so Ill link the whole piece

“It (..the Productivity Commission) was a senior partner in the promotion of the free market. We shouldn’t hand it another cut-throat policy razor to play with.”

………don’t be so silly, please. Any one-industry economy must strive to find persuits for the non industry involved population. If we start to micro examine how this…..this….um…income distribution ..er method works, then our whole mineral exploitaion economy could collapse. The last thing that we need post global financial collapse, and pre election, is people questioning their existence.

Particularly mine.

You have to realise that every income in Australia hangs precariously balanced, mobile fashion, from that one industry thread. When we had more threads, agriculture/ manufacturing/innovation/etc, and everything was cross reinforced it was right to hack away rotten the threads. Not now.

No they don’t, as evidenced by the current congestion and the debate over charging for it.

They take no account of driver skill, or whether parallel public transport is available and only peripheral account of tare. Even a zero carbon vehicle (if one could have one) damages roads, increases the prospect of collision and holds up others.

We want to target the right things and fuel excise is too blunt an instrument.

You have a point with electric vehicles, but as for the rest. Driver skill is highly subjective, daily variable, and descriminatory if personal performance became negatively taxable. Excise revenues have been ensconced into general tax revenue and no longer relate to their original justification, just as would happen with what you are proposing.

_________________________

The original impetus for privatisation came from a fad of thinking that went “governments have no place in business, they should regulate, while business should manage”, and obtained its strongest support from investment funds such as insurance companies and marchant bankers who were in need of stable, high profit, low effort, perpetual investments. Electricity, water, air. Anything that people cannot live without. “And why shouldn’t they make a high profit from essential needs? after all, the profits are returned to the public in the form of retirement income “. What is wrong with that is that it is 50 years before those who need the most of those commodities, families, get any benefit if they ever do. And the investment funds were soon not happy, either because these essential commodities were not very “exciting” (read profitable) so they sought ever higher returns in new and imaginatively complex ways. And that lead to global financial meltdown, which now falls on the public to put right, again.

The argument that the public cannot use their “body corporate” to do community works for the common good always was a “crock”.

On the contrary, you could have skills acquired in properly conducted tests and regular tests at the completion of drive training programs by audited providers. This would measure not merelty defensive driving skills but reaction times and so forth. Compliance with road laws would also be a factor.

Moreover, there is no exact correlation between vehicle tare and fuel usage, and it is even worse if someone puts 4 people in their car. This is something you would want people to do, yet you’d be taxing them extra for it.

So you accept that “They would have no case at all for compensation.” is not really correct, especially if they have a clause in their contract with government that specifically notes the need for compensation.

@Fran Barlow
years ago when I studied with a lecturer who was a specialist in human factors / driver behaviour he said there was no indication that better driver skills / reaction times etc impacted on things like safer driving (in terms of accidents). The term used was ‘risk homeostasis’ – people tend to see themselves as capable of handling a certain level of risk – increase the skills and more skilled drivers take more risks.
Of course other evidence may have emerged since then

That comment was based on there being no such clause in the contract … and it is hard to imagine that there could be, especially after the argument over rat runs …

Absent such a clause, it is settled law that all contracts over land usage must be specified in writing and duly witnessed. Any attempt to introduce implied terms would fail, and one doubts the toll people would dare try it anyway.

@BilB
ha ha Bilb….how I laughed…how could I have been so silly as to think any other than resource mining is good for Australia..because naturally its so profitable the rest of us should should all be genuflecting to its great omniscience…

@BilB
And Bilb…if your logic and history is correct we have indeed, as we should have done, …hacked away at all those faulty and inefficient threads across so many wasteful industries that for most of this century kept our inefficient economy growing but it was right to keep hacking away at inefficient waste in all those myriad of wasteful industries

..so now we are hanging by a single thread of pure efficiency that links one way to BHP via Macbank and onward to China. For God’s sake..dont sneeze Bilb…the whole lot could go down!

Why would you assume there is no such clause? And you certainly didn’t put in that caveat. These types of clauses are quite common in those sorts of contracts. The parties that enter into contracts to build own and operate toll roads are not complete idiots. Even so, even if it weren’t in the contract, for the reasons you have outlined the government would feel obliged to pay compensation because if they did not do so no one would contract with them. Who would contract with government if government turns around and uses its power to destroy the value of that contract? So “They would have no case at all for compensation.” is not really correct.

All engineers, architects, builders, scientists, mathematicians are retrained in law (adverserial) with the proviso that they must never try their skills in a court of law.

It follows: No roads, no cars, no buildings, no aircraft, no trains, no power plants, no numbers, no computers…. no congestion, no pollution of the environment ……. and, finally, no more creative essays on the screen.

“Risk, and particularly uncertainty, has been ameliorated by governments through the inclusion of material adverse effect (MAE) clauses in BOOT contracts.14 These typically provide for a menu of responses that escalate from changing tolls or the length of the concession period to direct government financial compensation.” pg 20. And elsewhere.

In Public Infrastructure Financing — An International Perspective, Productivity Commission Staff Working Paper (2009). For example:

“The greatest risk to the viability of a toll-road project is revenue risk associated with traffic volumes. This risk has been addressed with the inclusion of ‘material adverse effect’ (MAE) clauses in the Concession or Project Deed.

The MAE clauses typically allow the private sector to seek redress against the government should it implement policy changes or approve projects that cause detriment to the PPP project revenue during the concession period (Hepburn et al. 1997). Compensation can be in the form of an increased concession term, or a right to increase the toll or user charges, or in monetary form, or a combination of those forms (Chew et al. 2004).” pg 165. And elsewhere.

Oh, I forgot, as per Fran Barlow, since the Greek government has changed recently, it can simply cancel all financial contracts entered by its predessor under the heading: as “a means of mapping this to a maintainable and transparent system.”

It suddenly occurred to me that no-one here can really believe in efficiency. If we were honestly interested in efficiency (please no checklists)…. the only way to really remove those nuisance poor and disadvantaged who cant afford escalating user pays charges for roads, hospitals, speeding fines, buildings, aircraft, power, computers etc is simply to launch another wasteful war and employ them as cannon fodder. Im sure the efficiency gods would approve.

In economic terms, a rich person is so much more deserving than a poor person, that is if you believe in dollar democracy – that every dollar was created equal, and was endowed by its creator, with the inalienable right to equal pursuit of goods and services (or, alternatively, purchasing power).

That is fanciful nonsense promoted by libertarians to promote the idea that regulating or spending government money trying to mitigate risk, including health and safety expenditure, yields no benefit, let alone net benefit, and may even, perversely make the dangers greater. There is a famous ‘study’ which no one has been able to replicate, which claimed that mandatory seat belts resulted in drivers driving more dangerously and having more accidents resulting in more and more serious accidents and deaths. “Libertarian research” is usually only replicable by other libertarians but that one wasn’t replicable by anyone.

First … a concession from me. It is the case that when I made the above claims, I hadn’t specific knowledge of the precise MAE provisions attaching to public financed toll roads in Australia. In part, this is because, especially in the case of those in Sydney, the precise MAE provisions are not available. One may speculate about why that is, but the intersection of commercial and political advantage to the players aside, precisely specifying what constitutes an MAE would always be difficult.

This discussion here on the comparative advantages of BOOT (Build Operate Own Transfer) and CTC (Competitive Tendering & Contracting) schemes with an overview of financing and management of risk in road projects is a good start.

Let us be clear. No matter who or how infrastructure is financed, the risk and uncertainty has to be shared about. It’s a zero sum game and it’s no surprise that private consortia are no more keen than any other stockholders to bear more risk than they anticipate and factor into their projects. When recovery of costs occurs over an extended period, as is the case in BOOT schemes, anything that affects the viability of the project (financing cost, revenue streams) adversely is a risk. Unsurprisingly, the more open-ended the risk to a private consortium the higher the revenue stream has to be.

I’m not going to engage in an extended post on the specifics of public road financing here, interesting though that would be to a handful of people. It is however improbable that in most of the cases were are discussing here, that substantial compensation to BOOT operators would flow from the introduction of a scheme such as I suggest. Firstly and most obviously, the M$ is now in public ownership (as of 2010). Moreover, general tolling for example, reduces the appeal of “rat runs” which in turn can adversely affect revenue to BOOT operators. Moreover, if the state were to assume full responsibility for tolling outside the BOOT roads, it would obviously require all vehicles to carry something equivalent to a transponder so as to facilitate universal collection. It would make sense to have this occur also on the toll roads, relieving the BOOT operator of the need to collect the tolls that underpinned the project finance. The government could simply “shadow toll”, paying the BOOT operator the tolled equivalent for every vehicle that would have incurred a toll under the pre-existing arrangements. Far from adversely affecting the BOOT operator, this would lower risk and compliance cost. A proviso could be added that should the revenue stream fall below the seasonal rate mean of the five years before the new arrangements, then the deficit would be paid to the operator, less any savings on compliance costs by the BOOT operator, who now need not maintain an expensive administrative apparatus. This cost and risk would now be transferred to the state.

In these circumstances of course, it might make sense for the BOOT roads to be transferred to the state by buying out the contracts. BOOT operators have little incentive to provide road maintenance beyond the specified minimum, costs are now settled, the remaining concession deeds now have a maximum 20 years to run and this is probably more inter-generationally equitable, since more of this cost falls upon future beneficiaries of the roads.

So this is a concession, at least in practice, that the claim that roads operators would have no basis for compensation in the event of change was too sweeping. In practice, if they were adversely affected by some event closely connected with an assumption on which they were entitled to rely when assessing the viability of the BOOT projects in question, they would get compensation. My point here is that in practice, the changes I’ve proposed either wouldn’t constitute an MAE under any arbitration or court based equity process, or if it did, then the compensation would be modest. In practice, the state could make arrangements that would satisfy sovereign risk objections at an acceptably low cost to the state.

@Freelander
freelander – As I said in my post I had not followed the theory closely, however your claim primarily takes the form ‘argument X is wrong because some people I don’t like use it’ which I do not find particularly effective. (of course politically that is a winner of a strategy)
A quick search gives this recent paper which does not seem to be particularly ‘libertarian’
“The Vienna Risk-Taking Test – Traffic: A New Measure of Road Traffic Risk-Taking
Hergovich,Arendasy,Sommer, and Bognar (2007)” it is a shame you did not link to any refuting evidence, but my quick reading of Wilde indicates a single test would not be sufficient to bring down the theory – (nor did it indicate that he was/is a libertarian, but I wasn’t really looking that hard)
I would not be surprised to see disagreement in the relevant literature – but libertarians using the concept of risk homeostasis to further their own political ends seems irrelevent to the substantive issue of the theory itself.

@Fran Barlow
Fran – you say “Let us be clear. No matter who or how infrastructure is financed, the risk and uncertainty has to be shared about. It’s a zero sum game”

There is no such thing as a zero sum game. When it comes to building and maintaining quality infrastructure to support an eceonomy its a positive. I see nothing in any private construction project that says the risk and uncertainty “has to be shared about.” The risk and uncertainty belongs entirely to the builders and financers of the project. Another meaningless furphy.

I note also you suggest numerous cushions for Boot operators…. but (and its a huge “but” and often craftily obscured in the fine print of the pps deal) at the end of the day the PP builder/operator’s “cost and risk would be transferred to the state.”

I see – privatise the profits and send the invoice for any privatisation losses to the state. Charming – the poor get to pay twice (once in tolls and twice in taxes or maybe …as in the case of NSW State Labor – road fines – if you read their financial statements. I think road /parking / camera fines are keeping the rats afloat in their stinking ship.

Thats exactly what is happening (bill the state if the project fails – I guess thats what you must mean by sharing the risk Fran?) and why PPPs are, in many instances, failing to get the job done.

If you actually read the Profs links – and take the case of the Clem7 tollroad and then read the 307 comments people have posted and then count the number of people saying the bleeding obvious….the operators are not meeting volume targets because of the one thing a market economist should understand

price, price, price…they are pricing themslves out of a profit.

Thats why volumes arent what were projected. Who’s responsibility is to project volumes? A bunch of executive suits earning way above the average wage of the toll road users?

Id like to ask whether this is, in fact a deliberate prcing strategy ($4 one way when most comments say $2 should be the price). The operators can pay themselves a fortune in salaries, make a fast enriching buck for themselves personally, engineer low loss making volumes, claim they were “mislead as to volumes”, sue the government and send the invoices for the losses directly to the state and move to takeover some other public road?? All the while singing the same sad song….”traffic volumes arent what was predicted.”Chalk up another big lawyer driven contingent liability on the states books. Oops – I forgot the debale wont be on the State’s books will it? The general government was cut away from GBE’s years ago and then there is commercial in confidence provisions.

Ill put $10 on the table to anyone who can find the evidence of contingent liabilities from failed PPS private roads…in the States myriad of different “books” now (NSW or QLD). Bit like Storm except more than two sets of books.

Its a monumental con and sleight of hand against the people of QLD…plus its been replicated a number of times over now in Sydney… “Traffic volumes werent what was projected…boo hoo… snigger snigger”.

Oh dear … what a disappointing start. Let’s see how you sustain this ostensibly outrageous claim.

When it comes to building and maintaining quality infrastructure to support an economy its a positive.

So your claim is modified to building and maintaining quality infrastructure is a positive sum game i.e. there are more winners than losers or there is net utility. This abandons your first claim and is misdirection. I’m favouring building and maintaining quality infrastructure on both the above grounds. That doesn’t mean that the business of financing the infrastructure doesn’t entail risk of loss to some party. All investment, including rational investment entails at least some risk and uncertainty. And if there is a given quantity of risk and uncertainty, dividing it up amongst the stakeholders is a zero sum game. If you do it rationally, everyone bears just what they are best placed to bear, is rewarded in ways commensurate with the risk and uncertainty they accept and is efficient and effective at managing the part of the risk attached to them. Yet it is still a zero sum game.

I see nothing in any private construction project that says the risk and uncertainty “has to be shared about.”

Which can only mean you are either disingenuous, not looking or have never been in business. You don’t think that the business model for a project funded on prospective toll revenue depends in significant part on getting the predictions about toll revenues, costs, interest on loans. future government policy changes, variations in oil price, demographics and one or two other things right? If the builder of the tolled road accepts all those risks, then plainly, they are probably going to have to pay a higher cost for the finance and that will make the cost of the project higher, which means ultimately passing that cost onto the people paying the tolls. Higher risk implies higher reward, and if they can’t have a commensurate reward, they won’t build or they won’t bid and then the project is assessed in a less competitive setting. That’s one of the reasons the state indemnifies building consortia against some risks. One can argue about the model and the burden sharing, but in the end, those liabilities, including the “Black Swan” type liabilities, must be borne by someone or the project won’t proceed.

at the end of the day the PP builder/operator’s “cost and risk would be transferred to the state.” I see – privatise the profits and send the invoice for any privatisation losses to the state.

This is another of your screeds Alice. The transfer of total cost and risk to the state occurs when the state acquires full equity over the project — as it did this year over the M4 i.e. when it becomes a public asset. Nobody serious in business accepts risks without consideration in the form of a capital asset or revenue.

the poor get to pay twice (once in tolls and twice in taxes or maybe …as in the case of NSW State Labor – road fines – if you read their financial statements. I think road /parking / camera fines are keeping the rats afloat in their stinking ship.

Well the point about zero sum games has totally disappeared into the ether, as has the fear that the state was a vehicle for paying off private business. Now we’re back to the state as some sort of self-perpetuating parasite on the poor. I don’t suppose it occurs to you that the really poor are almost certainly, for the most part, on public transport. If you are driving a car every day to work you are not poor, even by Australian standards. At worst, you are in the lower half of the bottom 80% but almost certainly not in the bottom 20%. If you observe the road rules you don’t pay camera or parking fines. Overall, we’d sooner most people stayed off the roads and went onto public transport, especially during the peak. As noted the bottom 80% suffer most by our failure to achieve this goal, precisely because we live in an unequal society.

So your plea is ill-considered, notwithstanding your desire to solidarise with the relatively disadvantaged. While there were, in my opinion, almost certainly better ways to fund this infrastructure in ways that serve general utility, the fact remains that each of the road projects funded via BOOT came on-stream ahead of schedule and under budget. Assuming these expressways were good ideas — and personally I’m not sure they were — then your claim that PPPs are failing to get the job done can’t be justified.

We have them now, so whatever one might have decided in the past, we should make best use of them, and that means de facto or de jure dealing with them as if they were part and parcel of the road network. If that means buying them out (and it need not), then IMO, so be it.

“If that means buying them out (and it need not), then IMO, so be it.”

Lets get on with it then… (buying back those miserable itsy bitsy PPs toll roads; the lame excuses for lack of public investment in infrastructure) and stop the pretense at their justification with statements like “its a zero sum” when some of the few insiders on these PPs deals are making multiplied sums from loss making ventures, at the public’s expense.

You can fool some of the people some of the time etc…but there is no such thing as a zero sum game when money is involved Fran (unless you think theft from some and subsequent gain by others all balances to zero – making it all perfectly “rational” and thus”utility maximising” and acceptable).

Ever heard of morals and ethics?

The majority are not stupid Fran – I await their votes as do many others.

but there is no such thing as a zero sum game when money is involved Fran (unless you think theft from some and subsequent gain by others all balances to zero – making it all perfectly “rational” and thus”utility maximising” and acceptable) …

The more I read from you Alice the more I wonder whether you comprehend the phrases you use.

The concept of the zero sum game is purely descriptive. It describes a situation where no stakeholder’s advantage can be improved except at the expense of some other stakeholder. Stakeholders gain advantage by externalising costs and risks to others. It says nothing about justice or fairness between the stakeholders.

It says absolutely nothing about justice and fairness, but worse than that….. it contributes absolutely zero to justice and fairness. Contrary to your interpretation – I understand completely the concept of redistribution being a zero sum game.

I just dont buy it as any sort of justification of economic policy initiatives, whatsoever.

Alice, take no notice of Fran Barlow. Word games and creative essay writing is all that Fran has to offer.

For example, Fran B @26 talks about ‘zero sum game’ in a way that confuses a confusion of Pareto efficiency with the definition of a zero sum game. It all verbal noise. On another thread, BilB battled for hours trying to remove the misconceptions.

Your first point about zero sum game was correct. Transport networks have a positive sum (positive externalities) up to the point where ‘nothing moves’ on the roads because of grid lock. As indicated in my tounge-in-cheek posts further up the thread, if people claim they have legal training then they can demonstrate their skills in a court of law.

You referring back to JQ’s post is spot on. In his post, JQ introduces 2 transport economics problems within the context of ideologically driven public asset sales, of which the privatisation (and the hybrids, PP and BOOT) of infrastructure assets are the interesting cases. (Obviously, if a hotel, located in a city with many hotels, is publicly owned, possibly for historical reasons, then the sale of this hotel to private enterprise is not an issue that deserves comment.) Interestingly, Fran B. provides a link to a policy paper from 1997, the era of interest, regarding the ideology in question. I have no evidence that Fran B. read or comprehended it.

For example, Fran B @26 talks about ‘zero sum game’ in a way that confuses the notion of Pareto efficiency with the definition of a zero sum game. F.Bs output is verbal noise. On another thread, BilB battled for hours trying to remove F.B’s misconceptions.

@Ernestine Gross
Astonishing array of nonsense and and incredulous length to it all…pushing privatisation and nuclear, rationality and utility (and removing the poor from our roads and windscreen vision)…. I agree Ernestine..not bad for an HS teacher who has apparently done so many uni courses and knows so much jargon from so any markets (and so few genuine statistics or genuine theory as you have indicated on a number of occasions)..add law now..and peddles half baked ideas that are now dying, here, there and everywhere.

At what point does self embarrassment kick in Ernestine?

I dont think anyone has let Fran know…”the old free market, free trade, globalisation, full knowledge, no government intrusion gang is breaking up since the GFC.” Not my quote btw but it sums it up nicely…and promises a few long overdue positive externalities for a change.

Even more irony … You and Ernestine, (who clearly shares your confusion on zero sum games and penchant for outlandish claims), show why rational policy in this country is so difficult to attain. Plainly, you see yourselves as advocates of just treatment of the social interests of the marginalised, which is not to be sneezed at, but have nothing coherent in the way of policy to offer. So all you can manage are populist jibes about how everyone is setting out to shaft the poor and get them out of your windscreens without for a second thinking what this can mean in practice.

It is hard to imagine why anyone would want the disadvantaged to be driving one more kilometre than they absolutely had to, or running a car when there was something better, or being forced to live on the margins of the big cities and spend 10 hours a week travelling and competing for road space with others of similar disadvantage. It is hard to know why you’d demand policies that entail more air pollution in the big cities and defer action on GHG mitigation by making it more costly to mitigate. Yet you do. This is a negative sum game in which the most marginalised lose most heavily. Wealthy people are not going to be living on the city fringe or within the footprint of the pollution spewing from those plants that have to run to cover wind and solar.

Yes, I’ve read such studies. Indeed, it is claimed that ABS braking is worthless for the same reason. How one would do double blind studies on this I don’t know.

Nevertheless, combined with other measures that restrain poor risk trading — conditions-based speed limits with real time monitoring, rewards for attaining and maintaining these skills (and penalties in status demotion for accidents and breaches) should foster a new culture around driver safety. It’s not so much the skill itself as the way in which drivers see themselves. Pride in being someone recognised on the roads as being a cut above the ordinary, measured in compliance, avoidance of accident and skill — is something I’d really like to see. Maybe qualified drivers could put badges on their cars that would signify the number of continuous days they had had their advanced driver status. Perhaps each year everyone who had had a certain number of days without infringement or collision in which they were at fault — say 500 — could be given awards and some of them cash prizes and get to have a picture taken with the Premier or some notable of their choice backing the program.

My own partner comments that whereas at 19 he saw his masculinity as bound up partly in whis willingness to test his skill on the roads, at 51 he takes pride in wringing better mileage out of the car and being a good citizen on the road. His reflexes are probably slower than they were at 19. Yet he hasn’t had even a near collision since he was 25. The idea of advanced driver training would be to start fostering this attitude as early as possible.

Yes it did, and you’d be wrong to conclude that I was pitching them. I rather lean towards the state assembling the finance, since it is good at that, and tendering the work with specifications about build quality, timelines and liquidated damages for non-compliance.

That of course implies the state taking on almost all the risk relating to each project’s feasibility and forfeiting the rent on land that BOOT partners were paying.

The authors of the paper seem to be suggesting the government own and operate roads but by all means put to tender the various aspects of construction. They must have been very naughty IC employees to be suggesting that!

@Ernestine Gross
Thanks Ernestine…Ive already been a target a few times because I dont agree with their nonsense that peddles..well basically vested interests and yet more inequality (the stuff that is undoing a positive approach to infrastructure investment and actually sharing the load equitably and making good use of our taxes instead of utterly wasting them on pie eyed ideas).

@Ernestine Gross
You know Ernestine…I think its high time rational man and his unquestioning disciples just…well…went somewhere else!. Maybe church on Sundays?? (might suit the majority of us better as well…for them to learn some morals and ethics etc).

Freelander :The authors of the paper seem to be suggesting the government own and operate roads but by all means put to tender the various aspects of construction. They must have been very naughty IC employees to be suggesting that!

Setting aside the last sentence, I concur with you. I’d like to add that the paper contains a record in chronological time of the motivation for private sector involvement, namely the financing of public roads during the economic rationalism period and the rule of rating agencies. It supports JQ’s posts on this topic and it is a good refresher of memory of events.

However let us not digress….are we all aware here that most privatisations were started by the Labor govt in the 1980s (poor things worried about our international business competitiveness..to be referred to henceforth as the Keating Business model of deregulation).

Yet under JH’s leadership privatisation really took off such that in 1997 Australia’s divestment of publicly owned assets reached 13% of the global total, exceeded only by Brazil. Electricity, gas, airports and telecommunications all fell (and we know who the airport went to and how much we all hate it…but thats only part of the sorry story).

We have created over time, one of the worlds greatest privatising regimes. We not only kept pace with the international privatisation model – we have excelled at it and gained silver at the international privatisation Olympics.

The signal here is that the government is no longer willing to supply the services, preferring instead private operation and a system of user pays. On the other hand, the people are voting with their cars and avoiding the price signals resulting in “volumes lower than projected” and failure of private enterprise.

The signal coming from the voters is that they are not entirely happy with “the model” and that is producing electoral volatility (it has started already with the backlash against the JH government). Pro privatisation proponents continue to push the now tired arguments…”to each according to his own ability to pay” “efficiency” “utility” “rationality”…when the mass public choices are swinging, frankly on the side of preference for decent (and decently priced) public services.

The sad history of Australia’s over exuberant foray into disastrous privatisations is nicely encapsulated in the attitude of a Mr David Jull, in 1997, who suggested “if the service can be advertised in the yellow pages the government has no business providing it” (Taylor, 1997).

The reality is, that the real strength of the budget surplus the Howard Govt loved to boast about, came not from its inherent skills in building a strong economy and raising incomes, but rather from its public asset divestment programs which delivered windfall, short term gains from sell offs of assets accummulated by prior generations. under s.52 of the Trade Practices Act it would constitute misleading and deceptive conduct.

That raises yet another interesting question…are these two kilometre private toll roads like Clem7 contructed partially from roads misappropriated from the public “fit for the purpose” expecially when the purpose should be to move more traffic volumes smoothly in inner city areas.??

Jargon at the time of the mass privatisations included “its not core government business” yet for many the sell offs later soured – eg Telstra – the great “Mum and Dad” swindle. Yet to date there has been no rigorous evaluation of Australia’s international silver medal in the privatisation game. Governments have relied on anecdotal evidence concerning service quality and good governance. The reality is Australia values its public sector less, or so some would like to believe.

..but is it really so?

Perhaps its all mostly the result of a government with no real debate or opposition in the senate…and that brief, intoxicating period of Coalition power has ended, but may come to haunt the liberal party (and indeed now State labor parties in NSW and QLD) for longer than they expected.

The study cited is additional evidence of the institutional incompetence of governments as owners of commercial assets.

If an owner is unable to sell an asset at a profit under the full glare of the public eye, imagine how hopeless they are at the day-to-day running of commercial assets which attracts far less critical attention from voters unless there is a big stuff-up?

The one saving grace is that their trying to sell these assets.

God help us if they were tying to give it away such as the recent federal free home insulation fiasco.

The Qld state government is said to be incompetent at selling assets; the Feds can’t even give them away without making a mess of it.

“We have them now (pps privatisations), so whatever one might have decided in the past, we should make best use of them, and that means de facto or de jure dealing with them as if they were part and parcel of the road network.”

Thats the worst justification for economic policy I have ever heard especially from a supposed supporter of rationalism…”we have them (pps) now so we must make best use of them?”

No policy should ever been accepted on the basis that its is “here now and we should make the best of it”.

We develop and pay economic policy makers to think, evaluate and make sound decisions, not “make do”.

This does not follow. The politicians are not necessarily in the day to day business of running the road system, but they are highly involved in the selling of assets. Also, given that selling the assets is not a day to day thing, they have little expertise in this area. In addition, some of the ideologues in favour of selling assets believe that selling them for less than they are worth is a great idea. An example, of this was the Thatcher government where some argued that selling assets below their value or even giving them away was good because it would make it much harder for government to ever buy them back. Similarideas are to cripple government by restricting its ability to raise revenue, that is, tax.

The views you are propounding are probably only exceptable in some out of way, backward economy, like New Zealand. I would have said Iceland but I imagine they have now been jolted back to reality.

“The study cited is additional evidence of the institutional incompetence of governments as owners of commercial assets”

It seems you have a different study in mind to the one I read. Setting this point aside, I would agree that governments are not necessarily the best agent to own a “commercial asset”. The issue is, what is a ‘commercial asset’.

On “assets”.

While infrastructure, such as a road network, has a property of ‘an asset’, namely its useful life being longer than an instant in time, it doesn’t follow that all assets have the same property of a road network. I’ve given an example of the difference @28.

It is the privatisation of physical infrastructure that is the issue and not the sale of a single building, such as a hotel, or a shoe manufacturing enterprise or a coffee shop.

I am aware the term infrastructure is applied in various other contexts. For example, adhering to the physical technology, IT people speak of an infrastructure within one commercial enterprise when, for example, there is a server for several work stations. Note, as is the case with major public infrastructure, if the enterprise were to try to sell a part of its IT infrastructure, it would lose the lot. By contrast, selling one computer in the in-house IT network and replacing it with another one, possibly from a different manufacturer, does not destroy the network. Similarly, doing road works, or, more generally, extending a public infrastructure, using different contractors, does ot destroy the network of the ‘asset’.

There we have it, the short and the long, in the last two posts.
Aristotle would be smiling in his sleep just now; certain syllogistic errors are at last consigned to a rubbish bin long waiting for them.
Or can we ask if we are now in direct contact with one of the more Hobbesian proponents OF neoliberalism?

you make an interesting point about how “The politicians are not necessarily in the day to day business of running the road system, but they are highly involved in the selling of assets.”

So who is monitoring the day-to-day performance of these state owned enterprises?

Government owned enterprises face far greater problems from the separation of ownership and control than do private corporations. one example is the turnover of CEOs of government owned businesses is half that of private businesses.

the government solution to this problem of separation of ownership and control is to fill the boards of state owned enterprises with cronies. The recent trend towards more hiring on the basis of commercial expertise was a spin-off of the pre-privatisation process. still, SOEs are job lots for retired MPs and party officials.

What happens when the business goes bad, every state owned enterprise is too big to fail. Hardly the incentive structure to encourage value, service and innovation.